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What you Ought to Know About Dividends Research Team | Posted On Tuesday, April 07,2009, 12:18 PM

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What you Ought to Know About Dividends



First and foremost is that the dividend is not guaranteed. If a fund declared dividends twice last year, it does not indicate that it will do so again this year. You might get a dividend just once or you might not even get it this year.

Usually, funds whose NAV is above 10 are in a position to consider a dividend. Remember, though, declaring a dividend is exclusively at the fund's judgment; the periodicity is not certain nor the amount is fixed.

Which one should you take?

This purely depends on your overall investments and income. If you are looking out at a long-term investment and if you are not interested in money being given to you at various intervals, the growth option is the best meant for you. If you are wholehearted on receiving an income at various intervals, opt for the dividend option.

The most important one is the tax impact on dividends from mutual funds :

The Dividends from a mutual fund are not taxed. Now check out for the tax impact, when you sell the units. When you sell the units of a mutual fund to make a profit, it is known as capital gain. Equity and its related funds :

These would involve two types of funds :

  • An equity fund which invests in shares.
  • A balanced fund which invests in shares and fixed income instruments, that has more than 50% of its investments in shares.

If you try to sell the units of such funds within a year of your purchase, the profit on this sale is called a short-term capital gain. For which will be taxed 10% on short-term capital gain. If you try to make a profit by selling the units after a year, it is called long-term capital gain. For which tax is not there.

Debt funds

Debt funds are funds that invest in fixed income instruments (investments that give you a fixed return, like fixed deposits and bonds) and not in the stock market. If you sell the units of such a fund within one year of your purchase, the profit you make is called is short-term capital gain. It will be added to your total income and you will be taxed as per the tax bracket you now fall under.

This is why short-term capital gain is taxed. If you make a profit by selling these units after one year, it is called a long-term capital gain.In this case, indexation is taken into consideration (a type of computation that takes inflation into account).
Hence the tax is the lower of these:

  • 20% (of the long-term capital gain) + surcharge and less levied by the government after taking indexation into consideration.
  • 10% (of the long-term capital gain) + surcharge and less without taking indexation into consideration.

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